Vanguard Short-Term Corporate Bond

Vanguard Short-Term Corporate Bond VCSH fund offers a well-constructed portfolio of short-term corporate bonds at a razor-thin expense ratio. Focusing strictly on corporate bonds should position this fund to capture market rallies better than most of its Morningstar Category peers without pushing it too far into risky territory.

The fund tracks the Bloomberg U.S. 1-5 Year Corporate Bond Index, which provides a market-value-weighted portfolio of investment-grade corporate bonds with one to five years remaining to maturity. Eligible bonds must be denominated in U.S. dollars and have at least $300 million in outstanding face value. The index filters out certain types of bonds such as floating-rate bonds, contingent capital securities, Eurobonds without SEC registration, and bonds with equity features.

Financial services is the fund’s biggest sector by a wide margin, as these firms dominate the short-term, investment-grade corporate bond market. The fund tends to invest nearly half of its assets in the financial-services sector, followed by around 9% and 7% in technology and industrials, respectively.

Many funds in this category have wider mandates that include government and securitized bonds, which the fund omits by definition. Compared with the category average, the fund consistently underweights Treasuries and agency bonds by a wide margin. This pulls its credit risk profile into more aggressive territory. The majority of its assets are invested in bonds rated BBB or A, while its peers can load up on higher-rated government bonds instead.

The fund’s duration also runs slightly higher. It often allocates more to bonds in the three- to five-year maturity bucket than its category peers because many of them venture into ultrashort bonds instead. A longer average duration can make the fund more vulnerable to interest-rate-driven downturns.

Nonetheless, a low fee and relatively riskier profile have helped it regularly outperform the category average so far. The fund captured much of the market’s upside when credit spreads tightened or bond yields fell, making up for its underperformance during stressful periods. The fund has outperformed the category average by 87 basis points annualized from its 2009 inception through May 2023.